UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM10-Q
(Mark One)
☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended March 31, 20202021
☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period fromto
Commission File Number001-38783
VILLAGE FARMS INTERNATIONAL, INC.
(Exact name of Registrant as Specified in its Charter)
Canada |
4700-80th Street Delta, British Columbia Canada V4K 3N3 (Address of Principal Executive Offices) (Zip Code)
| |||||||||||||||
(604) 940-6012
Issuer’s phone number, including area code
N/A
(Former name, former address and former fiscal year, if changed since last report).
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Shares, without par value | VFF | The Nasdaq Stock Market LLC |
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the pastpreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files. Yes ☒ No ☐ Not Applicable ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer”, “small reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |||
Emerging growth company | ☒ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☐☒
As of May 14, 2020, 56,250,4196, 2021, 81,191,191 shares of common stock were issued and outstanding.
Page | |||||||
PART I - FINANCIAL INFORMATION | |||||||
Item 1. | Condensed Consolidated Interim Financial Statements (Unaudited) | ||||||
Condensed Consolidated Interim Statements of Financial Position | 2 | ||||||
Condensed Consolidated Interim Statements of | 3 | ||||||
Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity | 4 | ||||||
5 | |||||||
Notes to Condensed Consolidated Interim Financial Statements | 6 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 | |||||
Item 3. | 31 | ||||||
Item 4. | 31 | ||||||
33 | |||||||
Item 1. | 33 | ||||||
Item 1A. | |||||||
| |||||||
| 33 | ||||||
Item 6. | 33 | ||||||
34 | |||||||
PART 1 – FINANCIAL STATEMENTS
Item 1. Financial Statements
Forward Looking Statement
As used in this Quarterly Report on Form10-Q, the terms “Village Farms,” “Village Farms International,” the “Company,” “we,” “us,” “our” and similar references refer to Village Farms International, Inc. and our consolidated subsidiaries, and the term “Common Shares” refers to our common shares, no par value. Our financial information is presented in U.S. dollars and all references in this Quarterly Report on Form10-Q to “$” means U.S. dollars and all references to “C$” means Canadian dollars.
This Quarterly Report on Form10-Q contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the safe harbor created by those sections. This Quarterly Report on Form10-Q also contains “forward-looking information” within the meaning of applicable Canadian securities law. We refer to such forward-looking statements and forward-looking information collectively as “forward-looking statements”. Forward-looking statements may relate to the Company’s future outlook or financial position and anticipated events or results and may include statements regarding the financial position, business strategy, budgets, expansion plans, litigation, projected production, projected costs, capital expenditures, financial results, taxes, plans and objectives of or involving the Company. Particularly, statements regarding future results, performance, achievements, prospects or opportunities for the Company, the greenhouse vegetable industry or the cannabis industry are forward-looking statements. In some cases, forward-looking information can be identified by such terms as “outlook”, “may”, “might”, “will”, “could”, “should”, “would”, “occur”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “try”, “estimate”, “predict”, “potential”, “continue”, “likely”, “schedule”, “objectives”, or the negative or grammatical variation thereof or other similar expressions concerning matters that are not historical facts. The forward-looking statements in this Quarterly Report on Form10-Q are subject to risks that may include, but are not limited to: our limited operating history, including that of our Pure Sunfarms Corp. joint venture for the production of cannabis in Canada (our “Joint Venture”) and ourstart-up operations of growing hemp in the United States; the legal status of our Joint Venture;Pure Sunfarms cannabis business; risks relating to obtaining additional financing, including our dependence upon credit facilities; potential difficulties in achieving and/or maintaining profitability; variability of product pricing; risks inherent in the cannabis, hemp and agricultural businesses; the ability of our Joint VenturePure Sunfarms to cultivate and distribute cannabis in Canada; existing and new governmental regulations, including risks related to regulatory compliance and licenses (e.g., our Joint Venture’sPure Sunfarms ability to obtain licenses for its Delta 2 greenhouse facility as well as additional licenses under the Canadian act respecting cannabis to amend to the Controlled Drugs and Substances Act, the Criminal Code and other Acts, S.C. 2018, c. 16 (Canada) for its Delta 3 greenhouse facility), and changes in our regulatory requirements; risks relating to conversion of our greenhouses to cannabis production for our Joint Venture;Pure Sunfarms; risks related to rules and regulations at the U.S. federal (Food and Drug Administration and United States Department of Agriculture), state and municipal levels with respect to produce and hemp; retail consolidation, technological advances and other forms of competition; transportation disruptions; product liability and other potential litigation; retention of key executives; labor issues; uninsured and underinsured losses; vulnerability to rising energy costs; environmental, health and safety risks, foreign exchange exposure, risks associated with cross-border trade; difficulties in managing our growth; restrictive covenants under our credit facilities; natural catastrophes; the ongoing and developingCOVID-19 pandemic; and tax risks.
The Company has based these forward-looking statements on factors and assumptions about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs. Although the forward-looking statements contained in this Quarterly Report on Form10-Q are based upon assumptions that management believes are reasonable based on information currently available to management,
there can be no assurance that actual results will be consistent with these forward-looking statements. Forward-looking statements necessarily involve known and unknown risks and uncertainties, many of which are beyond the Company’s control, that may cause the Company’s or the industry’s actual results, performance, achievements, prospects and opportunities in future periods to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things, the factors contained in the Company’s filings with securities regulators, including this Quarterly Report on Form10-Q. In particular, we caution you that our forward-looking statements are subject to the ongoing and developing circumstances related to theCOVID-19 pandemic, which may have a material adverse effect on our business, operations and future financial results.
When relying on forward-looking statements to make decisions, the Company cautions readers not to place undue reliance on these statements, as forward-looking statements involve significant risks and uncertainties and should not be read as guarantees of future results, performance, achievements, prospects and opportunities. The forward-looking statements made in this Quarterly Report on Form10-Q relate only to events or information as of the date on which the statements are made in this Quarterly Report on Form10-Q. Except as required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.
PART I – FINANCIAL STATEMENTS
Item 1. Financial Statements (Unaudited)
Village Farms International, Inc.
Condensed Consolidated Interim Statements of Financial Position
(In thousands of United States dollars, except share data)
(Unaudited)
|
| March 31, 2021 |
|
| December 31, 2020 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 131,696 |
|
| $ | 21,640 |
|
Restricted cash |
|
| 4,091 |
|
|
| 4,039 |
|
Trade receivables |
|
| 33,470 |
|
|
| 23,222 |
|
Inventories |
|
| 46,851 |
|
|
| 46,599 |
|
Other receivables |
|
| 181 |
|
|
| 145 |
|
Income tax receivable |
|
| 18 |
|
|
| 18 |
|
Prepaid expenses and deposits |
|
| 7,806 |
|
|
| 6,145 |
|
Total current assets |
|
| 224,113 |
|
|
| 101,808 |
|
Non-current assets |
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
| 192,583 |
|
|
| 187,020 |
|
Investment in minority interests |
|
| 1,726 |
|
|
| 1,226 |
|
Note receivable - joint venture |
|
| 3,423 |
|
|
| 3,545 |
|
Goodwill |
|
| 24,314 |
|
|
| 24,027 |
|
Intangibles |
|
| 17,317 |
|
|
| 17,311 |
|
Deferred tax asset |
|
| 13,711 |
|
|
| 13,312 |
|
Operating right-of-use assets |
|
| 3,549 |
|
|
| 3,797 |
|
Finance right-of-use assets |
|
| — |
|
|
| 35 |
|
Other assets |
|
| 1,830 |
|
|
| 1,950 |
|
Total assets |
| $ | 482,566 |
|
| $ | 354,031 |
|
LIABILITIES |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Line of credit |
| $ | — |
|
| $ | 2,000 |
|
Trade payables |
|
| 20,785 |
|
|
| 15,064 |
|
Current maturities of long-term debt |
|
| 10,434 |
|
|
| 10,166 |
|
Note payable |
|
| — |
|
|
| 15,314 |
|
Accrued liabilities |
|
| 21,077 |
|
|
| 22,438 |
|
Operating lease liabilities - current |
|
| 1,137 |
|
|
| 1,107 |
|
Finance lease liabilities - current |
|
| 21 |
|
|
| 27 |
|
Income tax payable |
|
| 2,827 |
|
|
| 4,523 |
|
Other current liabilities |
|
| 2,409 |
|
|
| 1,641 |
|
Total current liabilities |
|
| 58,690 |
|
|
| 72,280 |
|
Non-current liabilities |
|
|
|
|
|
|
|
|
Long-term debt |
|
| 55,869 |
|
|
| 53,913 |
|
Deferred tax liability |
|
| 16,793 |
|
|
| 18,059 |
|
Operating lease liabilities - non-current |
|
| 2,554 |
|
|
| 2,855 |
|
Finance lease liabilities - non-current |
|
| 4 |
|
|
| 8 |
|
Other liabilities |
|
| 1,769 |
|
|
| 1,633 |
|
Total liabilities |
|
| 135,679 |
|
|
| 148,748 |
|
Commitments and contingencies (note 17) |
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Common stock, no par value per share - unlimited shares authorized; 81,191,191 shares issued and outstanding at March 31, 2021 and 66,911,811 shares issued and outstanding at December 31, 2020. |
|
| 301,092 |
|
|
| 145,668 |
|
Additional paid in capital |
|
| 9,353 |
|
|
| 17,502 |
|
Accumulated other comprehensive income |
|
| 7,966 |
|
|
| 6,255 |
|
Retained earnings |
|
| 28,476 |
|
|
| 35,858 |
|
Total shareholders’ equity |
|
| 346,887 |
|
|
| 205,283 |
|
Total liabilities and shareholders’ equity |
| $ | 482,566 |
|
| $ | 354,031 |
|
| March 31, 2020 | December 31, 2019 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 13,558 | $ | 11,989 | ||||
Trade receivables | 9,602 | 8,997 | ||||||
Inventories | 15,546 | 15,918 | ||||||
Amounts due from joint ventures | 10,238 | 15,418 | ||||||
Other receivables | 201 | 342 | ||||||
Income tax receivable | 231 | 713 | ||||||
Prepaid expenses and deposits | 1,123 | 1,259 | ||||||
|
|
|
| |||||
Total current assets | 50,499 | 54,636 | ||||||
|
|
|
| |||||
Non-current assets | ||||||||
Property, plant and equipment | 61,687 | 63,158 | ||||||
Investment in joint ventures | 55,607 | 41,334 | ||||||
Notes receivable - joint ventures | 10,946 | 10,865 | ||||||
Deferred tax asset | 8,377 | 7,999 | ||||||
Right-of-use assets | 4,889 | 3,582 | ||||||
Other assets | 1,593 | 1,834 | ||||||
|
|
|
| |||||
Total assets | $ | 193,598 | $ | 183,408 | ||||
|
|
|
| |||||
LIABILITIES | ||||||||
Current liabilities | ||||||||
Line of credit | $ | 4,000 | $ | 2,000 | ||||
Trade payables | 9,019 | 12,653 | ||||||
Current maturities of long-term debt | 3,391 | 3,423 | ||||||
Accrued liabilities | 3,367 | 3,017 | ||||||
Operating lease liabilities - current | 718 | 875 | ||||||
Finance lease liabilities - current | 41 | 61 | ||||||
|
|
|
| |||||
Total current liabilities | 20,536 | 22,029 | ||||||
|
|
|
| |||||
Non-current liabilities | ||||||||
Long-term debt | 28,158 | 28,966 | ||||||
Deferred tax liability | 1,150 | 1,873 | ||||||
Operating lease liabilities -non-current | 4,238 | 2,690 | ||||||
Finance lease liabilities -non-current | 39 | 34 | ||||||
Other liabilities | 1,103 | 1,357 | ||||||
|
|
|
| |||||
Total liabilities | 55,224 | 56,949 | ||||||
|
|
|
| |||||
Commitments and contingencies (note 15) | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock, no par value per share - unlimited shares authorized; 56,250,419 shares issued and outstanding at March 31, 2020 and 52,656,669 shares issued and outstanding at December 31, 2019. | 105,656 | 98,333 | ||||||
Additional paid in capital | 4,880 | 4,351 | ||||||
Accumulated other comprehensive loss | (602 | ) | (475 | ) | ||||
Retained earnings | 28,440 | 24,250 | ||||||
|
|
|
| |||||
Total shareholders’ equity | 138,374 | 126,459 | ||||||
|
|
|
| |||||
Total liabilities and shareholders’ equity | $ | 193,598 | $ | 183,408 | ||||
|
|
|
| |||||
The accompanying notes are an integral part of these condensed consolidated interim financial statements.Condensed Consolidated Interim Statements of Financial Position.
Village Farms International, Inc.
Condensed Consolidated Interim Statements of Income (Loss) and Comprehensive Income (Loss)
(In thousands of United States dollars, except per share data, unless otherwise noted)data)
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
Sales | $ | 32,112 | $ | 31,890 | ||||
Cost of sales | (31,347 | ) | (31,215 | ) | ||||
|
|
|
| |||||
Gross margin | 765 | 675 | ||||||
Selling, general and administrative expenses | (3,921 | ) | (4,242 | ) | ||||
Share-based compensation | (529 | ) | (1,296 | ) | ||||
Interest expense | (537 | ) | (694 | ) | ||||
Interest income | 383 | 136 | ||||||
Foreign exchange (loss) gain | (926 | ) | 278 | |||||
Gain on settlement agreement | 4,681 | — | ||||||
Other income (expense) | 39 | (130 | ) | |||||
(Loss) gain on disposal of assets | (6 | ) | 13,564 | |||||
|
|
|
| |||||
(Loss) income before taxes and earnings from unconsolidated entities | (51 | ) | 8,291 | |||||
Benefit of (provision for) income taxes | 1,012 | (4,436 | ) | |||||
|
|
|
| |||||
Income from consolidated entities after income taxes | 961 | 3,855 | ||||||
Equity earnings from unconsolidated entities | 3,229 | 2,611 | ||||||
|
|
|
| |||||
Net income | $ | 4,190 | $ | 6,466 | ||||
|
|
|
| |||||
Basic income per share | $ | 0.08 | $ | 0.14 | ||||
| �� |
|
|
|
| ||||
Diluted income per share | $ | 0.08 | $ | 0.13 | ||||
|
|
|
| |||||
Weighted average number of common shares used in the computation of net income per share (in thousands): | ||||||||
Basic | 52,933 | 47,677 | ||||||
|
|
|
| |||||
Diluted | 54,175 | 49,506 | ||||||
|
|
|
| |||||
Net income | $ | 4,190 | $ | 6,466 | ||||
Other comprehensive (loss) income: | ||||||||
Foreign currency translation adjustment | (127 | ) | 44 | |||||
|
|
|
| |||||
Comprehensive income | $ | 4,063 | $ | 6,510 | ||||
|
|
|
| |||||
|
| Three Months Ended March 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Sales |
| $ | 52,396 |
|
| $ | 32,112 |
|
Cost of sales |
|
| (50,089 | ) |
|
| (31,347 | ) |
Gross margin |
|
| 2,307 |
|
|
| 765 |
|
Selling, general and administrative expenses |
|
| (8,092 | ) |
|
| (3,921 | ) |
Share-based compensation |
|
| (1,998 | ) |
|
| (529 | ) |
Interest expense |
|
| (741 | ) |
|
| (537 | ) |
Interest income |
|
| 3 |
|
|
| 383 |
|
Foreign exchange loss |
|
| (504 | ) |
|
| (926 | ) |
Gain on settlement agreement |
|
| — |
|
|
| 4,681 |
|
Other (expense) income |
|
| (69 | ) |
|
| 39 |
|
Loss on disposal of assets |
|
| — |
|
|
| (6 | ) |
Loss before taxes and earnings of unconsolidated entities |
|
| (9,094 | ) |
|
| (51 | ) |
Recovery of income taxes |
|
| 1,839 |
|
|
| 1,012 |
|
(Loss) income from consolidated entities after income taxes |
|
| (7,255 | ) |
|
| 961 |
|
Equity (losses) earnings from unconsolidated entities |
|
| (127 | ) |
|
| 3,229 |
|
Net (loss) income |
| $ | (7,382 | ) |
| $ | 4,190 |
|
Basic (loss) income per share |
| $ | (0.10 | ) |
| $ | 0.08 |
|
Diluted (loss) income per share |
| $ | (0.10 | ) |
| $ | 0.08 |
|
Weighted average number of common shares used in the computation of net (loss) income per share (in thousands): |
|
|
|
|
|
|
|
|
Basic |
|
| 76,022 |
|
|
| 52,933 |
|
Diluted |
|
| 76,022 |
|
|
| 54,175 |
|
Net (loss) income |
| $ | (7,382 | ) |
| $ | 4,190 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
| 1,711 |
|
|
| (127 | ) |
Comprehensive (loss) income |
| $ | (5,671 | ) |
| $ | 4,063 |
|
The accompanying notes are an integral part of these condensed consolidated interim financial statements.Condensed Consolidated Interim Statements of Income (Loss) and Comprehensive Income (Loss).
Village Farms International, Inc.
Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity
(In thousands of United States dollars, except share data)for shares outstanding)
(Unaudited)
| Number of Common Shares | Common Stock | Additional paid in capital | Accumulated Other Comprehensive (Loss) Income | Retained Earnings | Total Shareholders’ Equity | |||||||||||||||||||
Balance at January 1, 2019 | 47,642,672 | $ | 60,872 | $ | 2,198 | $ | (562 | ) | $ | 21,925 | $ | 84,433 | ||||||||||||
Shares issued on exercise of stock options | 15,999 | 54 | (18 | ) | — | — | 36 | |||||||||||||||||
Share-based compensation | 153,332 | 908 | 388 | — | — | 1,296 | ||||||||||||||||||
Issuance costs | — | (2 | ) | — | — | — | ||||||||||||||||||
Cumulative translation adjustment | — | — | — | 44 | — | 44 | ||||||||||||||||||
Net income | — | — | — | — | 6,466 | 6,466 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at March 31, 2019 | 47,812,003 | $ | 61,832 | $ | 2,568 | $ | (518 | ) | $ | 28,391 | $ | 92,273 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at January 1, 2020 | 52,656,669 | $ | 98,333 | $ | 4,351 | $ | (475 | ) | $ | 24,250 | $ | 126,459 | ||||||||||||
Share issued in public offering, net of issuance costs | 3,593,750 | 7,323 | — | — | — | 7,323 | ||||||||||||||||||
Share-based compensation | — | — | 529 | — | — | 529 | ||||||||||||||||||
Cumulative translation adjustment | — | — | — | (127 | ) | — | (127 | ) | ||||||||||||||||
Net income | — | — | — | — | 4,190 | 4,190 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at March 31, 2020 | 56,250,419 | $ | 105,656 | $ | 4,880 | $ | (602 | ) | $ | 28,440 | $ | 138,374 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Three Months Ended March 31, 2021 |
| |||||||||||||||||||||
|
| Number of Common Shares (in thousands) |
|
| Common Stock |
|
| Additional Paid in Capital |
|
| Accumulated Other Comprehensive (Loss) Income |
|
| Retained Earnings |
|
| Total Shareholders’ Equity |
| ||||||
Balance at January 1, 2021 |
|
| 66,912 |
|
| $ | 145,668 |
|
| $ | 17,502 |
|
| $ | 6,255 |
|
| $ | 35,858 |
|
| $ | 205,283 |
|
Shares issued in public offering, net of issuance costs |
|
| 10,887 |
|
|
| 127,489 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 127,489 |
|
Shares issued on exercise of warrants |
|
| 3,045 |
|
|
| 27,743 |
|
|
| (10,080 | ) |
|
| — |
|
|
| — |
|
|
| 17,663 |
|
Shares issued on exercise of stock options |
|
| 104 |
|
|
| 192 |
|
|
| (67 | ) |
|
| — |
|
|
| — |
|
|
| 125 |
|
Share-based compensation |
|
| 243 |
|
|
| — |
|
|
| 1,998 |
|
|
| — |
|
|
| — |
|
|
| 1,998 |
|
Cumulative translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,711 |
|
|
| — |
|
|
| 1,711 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7,382 | ) |
|
| (7,382 | ) |
Balance at March 31, 2021 |
|
| 81,191 |
|
| $ | 301,092 |
|
| $ | 9,353 |
|
| $ | 7,966 |
|
| $ | 28,476 |
|
| $ | 346,887 |
|
|
| Three Months Ended March 31, 2020 |
| |||||||||||||||||||||
|
| Number of Common Shares (in thousands) |
|
| Common Stock |
|
| Additional Paid in Capital |
|
| Accumulated Other Comprehensive Loss |
|
| Retained Earnings |
|
| Total Shareholders’ Equity |
| ||||||
Balance at January 1, 2020 |
|
| 52,657 |
|
| $ | 98,333 |
|
| $ | 4,351 |
|
| $ | (475 | ) |
| $ | 24,250 |
|
| $ | 126,459 |
|
Shares issued in public offering, net of issuance costs |
|
| 3,594 |
|
|
| 7,323 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,323 |
|
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 529 |
|
|
| — |
|
|
| — |
|
|
| 529 |
|
Cumulative translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (127 | ) |
|
| — |
|
|
| (127 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,190 |
|
|
| 4,190 |
|
Balance at March 31, 2020 |
|
| 56,251 |
|
| $ | 105,656 |
|
| $ | 4,880 |
|
| $ | (602 | ) |
| $ | 28,440 |
|
| $ | 138,374 |
|
The accompanying notes are an integral part of these condensed consolidated interim financial statements.Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity.
Village Farms International, Inc.
Condensed Consolidated Interim Statements of Cash Flows
(In thousands of United States dollars)
(Unaudited)
| Three Months Ended March 31, |
| Three Months Ended March 31, |
| |||||||||||||
| 2020 | 2019 |
| 2021 |
|
| 2020 |
| |||||||||
Cash flows used in operating activities: |
|
|
|
|
|
|
|
| ||||||||
Net income | $ | 4,190 | $ | 6,466 | ||||||||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Net (loss) income |
| $ | (7,382 | ) |
| $ | 4,190 |
| ||||||||
Adjustments to reconcile net (loss) income to net cash used in operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization | 1,530 | 1,926 |
|
| 3,225 |
|
|
| 1,530 |
| ||||||
Amortization of deferred charges | 19 | 19 |
|
| 78 |
|
|
| 19 |
| ||||||
Share of income from joint ventures | (3,229 | ) | (2,611 | ) | ||||||||||||
Share of loss (income) from joint ventures |
|
| 127 |
|
|
| (3,229 | ) | ||||||||
Interest expense | 537 | 694 |
|
| 741 |
|
|
| 537 |
| ||||||
Interest income | (383 | ) | (136 | ) |
|
| (3 | ) |
|
| (383 | ) | ||||
Interest paid on long-term debt | (538 | ) | (662 | ) |
|
| (851 | ) |
|
| (538 | ) | ||||
Gain on settlement agreement | (4,681 | ) | — |
|
| — |
|
|
| (4,681 | ) | |||||
Loss (gain) on disposal of assets | 6 | (13,564 | ) | |||||||||||||
Lease payments | (271 | ) | (254 | ) | ||||||||||||
Interest paid on finance leases | (1 | ) | (3 | ) | ||||||||||||
Loss on disposal of assets |
|
| — |
|
|
| 6 |
| ||||||||
Non-cash lease expense |
|
| (128 | ) |
|
| (271 | ) | ||||||||
Interest paid on finance lease |
|
| — |
|
|
| (1 | ) | ||||||||
Share-based compensation | 529 | 1,296 |
|
| 1,998 |
|
|
| 529 |
| ||||||
Deferred income taxes | (468 | ) | 4,823 |
|
| (2,538 | ) |
|
| (468 | ) | |||||
Changes innon-cash working capital items | 2,225 | (3,540 | ) |
|
| (9,703 | ) |
|
| 2,225 |
| |||||
|
| |||||||||||||||
Net cash used in operating activities | (535 | ) | (5,546 | ) |
|
| (14,436 | ) |
|
| (535 | ) | ||||
|
| |||||||||||||||
Cash flows used in investing activities: |
|
|
|
|
|
|
|
| ||||||||
Purchases of property, plant and equipment, net of rebate | (259 | ) | (167 | ) | ||||||||||||
Purchases of property, plant and equipment |
|
| (4,706 | ) |
|
| (259 | ) | ||||||||
Advances to joint ventures | — | (2,251 | ) |
|
| (5 | ) |
|
| — |
| |||||
Proceeds from sale of asset | — | 60 | ||||||||||||||
Investment in joint ventures | (6,063 | ) | (7 | ) |
|
| — |
|
|
| (6,063 | ) | ||||
|
| |||||||||||||||
Investment in minority interests |
|
| (500 | ) |
|
| — |
| ||||||||
Net cash used in investing activities | (6,322 | ) | (2,365 | ) |
|
| (5,211 | ) |
|
| (6,322 | ) | ||||
|
| |||||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Cash flows provided by financing activities: |
|
|
|
|
|
|
|
| ||||||||
Proceeds from borrowings | 2,000 | 3,000 |
|
| 4,176 |
|
|
| 2,000 |
| ||||||
Repayments on borrowings | (875 | ) | (837 | ) |
|
| (4,223 | ) |
|
| (875 | ) | ||||
Proceeds from issuance of common stock | 7,957 | — | ||||||||||||||
Proceeds from issuance of common stock and warrants |
|
| 135,000 |
|
|
| 7,957 |
| ||||||||
Issuance costs | (633 | ) | — |
|
| (7,511 | ) |
|
| (633 | ) | |||||
Proceeds from exercise of stock options | — | 34 |
|
| 125 |
|
|
| — |
| ||||||
Proceeds from exercise of warrants |
|
| 17,663 |
|
|
| — |
| ||||||||
Payments on capital lease obligations | (21 | ) | (18 | ) |
|
| (155 | ) |
|
| (21 | ) | ||||
|
| |||||||||||||||
Payment of note payable related to acquisition |
|
| (15,498 | ) |
|
| — |
| ||||||||
Net cash provided by financing activities | 8,428 | 2,179 |
|
| 129,577 |
|
|
| 8,428 |
| ||||||
|
| |||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (2 | ) | — |
|
| 178 |
|
|
| (2 | ) | |||||
|
| |||||||||||||||
Net increase (decrease) in cash and cash equivalents | 1,569 | (5,732 | ) | |||||||||||||
Net increase in cash and cash equivalents |
|
| 110,108 |
|
|
| 1,569 |
| ||||||||
Cash and cash equivalents, beginning of period | 11,989 | 11,920 |
|
| 25,679 |
|
|
| 11,989 |
| ||||||
|
| |||||||||||||||
Cash and cash equivalents, end of period | $ | 13,558 | $ | 6,188 |
| $ | 135,787 |
|
| $ | 13,558 |
| ||||
|
| |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
VILLAGE FARMS INTERNATIONAL, INC.
Notes to Condensed Consolidated Interim Financial Statements
(In thousands of United States dollars, except per share amounts, unless otherwise noted)
1 | NATURE OF OPERATIONS |
Village Farms International, Inc. (“VFF” the parent company,) and together with its subsidiaries the(the “Company”, “we”, “us”, or “our”) is incorporated under the Canada Business Corporation Act. VFF’s principal operating subsidiaries as of March 31, 20202021 are Village Farms Canada Limited Partnership (“VFCLP”), Village Farms, L.P. (���(“VFLP”), and VF Clean Energy, Inc. (“VFCE”), and Pure Sunfarms Corp. (“Pure Sunfarms” or “PSF”). The address of the registered office of VFF is 4700 80th Street, Delta, British Columbia, Canada, V4K 3N3. VFF owns a 65% equity interest in Village Fields Hemp USA LLC (“VF Hemp”) and a 58.7% equity interest in Pure Sunfarms Corp. (“Pure Sunfarms”), both of which areis recorded as Investments in Joint Venturesan equity investment (note 7)9).
The Company’s shares are listed on both the Toronto Stock Exchange under the symbol VFF and are also listed in the United States on the Nasdaq Capital Market (“Nasdaq”), in each case, under the symbol VFF.“VFF”.
The Company owns and operates sophisticated, highly intensive agricultural greenhouse facilities in British Columbia and Texas, where it produces, markets and sells premium-quality tomatoes, bell peppers, and cucumbers. The Company, through its subsidiary VFCE, owns and operates a 7.0 MW power plant that generates electricity. The Company’s joint venture, Pure Sunfarms, is a licensed producer and supplier of cannabis products to be sold to other licensed providers and provincial governments across Canada and internationally. The Company’s joint ventures,Company, through its subsidiary VFCE, owns and operates a 7.0 MW power plant that generates electricity. VF Hemp and AVGG Hemp, are cultivatorscultivated one crop season of high cannabidiol (“CBD”) hemp in multiple states throughout the United States.
Coronavirus pandemic(“COVID-19”)
In March 2020, the World Health Organization declared the outbreak of theCOVID-19 virus a global pandemic. This outbreak is causing major disruptions to businesses and markets worldwide as the virus continues to spread. A number of countries as well as certain states and cities within the United States have enacted temporary closures of businesses, issued quarantine orshelter-in-place orders and taken other restrictive measures in response toCOVID-19.2017.
To date, all of the Company’s operations are operating normally, however, the extent to whichCOVID-19 and the related global economic crisis, affect the Company’s business, results of operations and financial condition, will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and any recovery period, future actions taken by governmental authorities, central banks and other third parties (including new financial regulation and other regulatory reform) in response to the pandemic, and the effects on our produce, clients, vendors and employees. Village Farms continues to service its customers amid uncertainty and disruption linked toCOVID-19 and is actively managing its business to respond to the impact.
2 | BASIS OF PRESENTATION |
The accompanying unaudited Condensed Consolidated Interim Financial Statements for the three months ended March 31, 20202021 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form10-Q and Rule10-01 of RegulationS-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for fair presentation have been included. Operating results for the three months ended March 31, 20202021 are subject to seasonal variations and may be impacted by the COVID-19 pandemic and accordingly are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.2021. For further information, refer to the Consolidated Financial Statements and notes thereto included in our Annual Report on Form10-K for the fiscal yearyears ended December 31, 20192020 and 2018.
Other than as described below, there were no changes to our significant accounting policies described in our annual financial statements that had a material impact on our financial statements and related notes.2019.
3 | NEW ACCOUNTING PRONOUNCEMENTS |
In August 2018,March 2020, the FASBFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2018-13, “Fair Value Measurement 2020-04, Reference Rate Reform (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” ASU2018-13 removes the disclosure requirement for the amount and reasons for transfers between Level 1 and Level 2 fair value measurements as well as the process for Level 3 fair value measurements. In addition, the ASU adds the disclosure requirements for changes in unrealized gains and losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end848): Facilitation of the reporting periodEffects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to debt instruments, derivatives, and other contracts that reference LIBOR or other reference rates expected to be discontinued as well as the rangea result of reference rate reform. This guidance is optional and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.may be elected through December 31, 2022 using a prospective application on all eligible contract modifications. The Company adopted ASU2018-13 on January 1, 2020. The adoptionhas a line of this standard did notcredit that incorporates LIBOR as a referenced interest rate. It is difficult to predict what effect, if any, the phase-out of LIBOR and the use of alternative benchmarks may have a material impact on the Company’s consolidatedbusiness or on the overall financial statements and related disclosures.
6
VILLAGE FARMS INTERNATIONAL, INC.
Notes to Condensed Consolidated Interim Financial Statements
(In thousands of United States dollars, except per share amounts, unless otherwise noted)
In June 2016, the FASB issued ASU2016-13, “Financial Instruments—Credit Losses.” The standard, including subsequently issued amendments, requires a financial asset measured at amortized cost basis, such as accounts receivable and certain other financial assets, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company adopted ASU2016-13 on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.
4 | INVENTORIES |
Inventories, consisting of crop inventory, purchased produce inventory and spare parts inventory are valued at the lower of cost or net realizable value. Cost is determined using the weighted average cost method. Costs included in crop inventory include but are not limited to raw material packaging, direct labor, overhead, and the depreciation of growing equipment and facilities determined at normal capacity. These costs are expensed as cost of sales when the crops are sold.
Inventories consisted of the following as of March 31, 2020 and December 31, 2019:of:
Classification | March 31, 2020 | December 31, 2019 |
| March 31, 2021 |
|
| December 31, 2020 |
| ||||||||
Cannabis: |
|
|
|
|
|
|
|
| ||||||||
Available for sale - flower and trim |
| $ | 13,785 |
|
| $ | 12,720 |
| ||||||||
Distilled oil |
|
| 14,288 |
|
|
| 13,511 |
| ||||||||
Capitalized production costs |
|
| 1,108 |
|
|
| 3,438 |
| ||||||||
Other |
|
| 2,436 |
|
|
| 2,552 |
| ||||||||
Produce and Energy: |
|
|
|
|
|
|
|
| ||||||||
Crop inventory | $ | 14,672 | $ | 15,281 |
|
| 14,454 |
|
|
| 13,441 |
| ||||
Purchased produce inventory | 770 | 530 |
|
| 650 |
|
|
| 810 |
| ||||||
Spare parts inventory | 104 | 107 |
|
| 130 |
|
|
| 127 |
| ||||||
|
| |||||||||||||||
Inventories | $ | 15,546 | $ | 15,918 | ||||||||||||
|
| |||||||||||||||
Inventory |
| $ | 46,851 |
|
| $ | 46,599 |
| ||||||||
5 | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is allocated between cost of sales and SG&A expenses depending on the type of asset and is determined using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the remaining life of the lease or useful life of the asset, whichever is shorter. Maintenance and repairs are charged to cost of sales when incurred. Significant expenditures, which extend the useful lives of assets, are capitalized. Land is not depreciated. The estimated useful lives of the class of assets for the current and comparative periods are as follows:
|
| |
Construction in process reflects the cost of assets under construction, which are not depreciated until placed into service.
Property, plant and equipment consisted of the following:
Classification |
| March 31, 2021 |
|
| December 31, 2020 |
| ||
Land |
| $ | 10,534 |
|
| $ | 10,447 |
|
Leasehold and land improvements |
|
| 4,158 |
|
|
| 4,154 |
|
Buildings |
|
| 143,163 |
|
|
| 142,060 |
|
Machinery and equipment |
|
| 70,080 |
|
|
| 69,390 |
|
Construction in progress |
|
| 59,773 |
|
|
| 52,960 |
|
Less: Accumulated depreciation |
|
| (95,125 | ) |
|
| (91,991 | ) |
Property, plant and equipment, net |
| $ | 192,583 |
|
| $ | 187,020 |
|
6 | INTANGIBLES |
Intangibles consisted of the following as of March 31, 2020 and December 31, 2019:of:
Classification | March 31, 2020 | December 31, 2019 | ||||||
Land | $ | 3,204 | $ | 3,204 | ||||
Leasehold and land improvements | 3,820 | 3,820 | ||||||
Greenhouses and other buildings | 72,853 | 72,772 | ||||||
Machinery and equipment | 61,498 | 61,871 | ||||||
Construction in progress | 1,745 | 1,697 | ||||||
Less: Accumulated depreciation | (81,433 | ) | (80,206 | ) | ||||
|
|
|
| |||||
Property, plant and equipment | $ | 61,687 | $ | 63,158 | ||||
|
|
|
| |||||
Classification |
| March 31, 2021 |
|
| December 31, 2020 |
| ||||
Licenses |
| $ | 13,023 |
|
| $ | 12,870 |
| ||
Branding |
|
| 3,733 |
|
|
| 3,688 |
| ||
Computer Software |
|
| 956 |
|
|
| 945 |
| ||
Less: Accumulated amortization |
|
| (395 | ) |
|
| (192 | ) | ||
Intangibles, net |
| $ | 17,317 |
|
| $ | 17,311 |
| ||
7
VILLAGE FARMS INTERNATIONAL, INC.
Notes to Condensed Consolidated Interim Financial Statements
(In thousands of United States dollars, except per share amounts, unless otherwise noted)
The expected future amortization expense for definite-lived intangible assets as of March 31, 2021 was as follows:
Fiscal period |
|
|
|
|
Remainder of 2021 |
| $ | 590 |
|
2022 |
|
| 786 |
|
2023 |
|
| 780 |
|
2024 |
|
| 780 |
|
2025 |
|
| 688 |
|
Thereafter |
|
| 9,960 |
|
Intangibles, net |
| $ | 13,584 |
|
7 | LEASES |
On August 7, 2019, theThe Company entered intoleases a parcel of land in Marfa, Texas that one of its greenhouses resides on as well as two distribution centers located in Fort Worth, Texas and Surrey, British Columbia. The Company leases production-related equipment at its greenhouses in Texas and British Columbia. The Company also leases an operating lease agreement for 8,341 square feet of office spacebuilding located in Lake Mary, Florida. The lease commenced on January 1, 2020 and has a lease term of 88 months with an option to extendFlorida for five years. The base rent for the lease will be adjusted annually by multiplying the base rent by 1.025. The initial lease liability was calculated as the present value of the lease payments using an incremental borrowing rate of 4.98%. Theright-of-use asset was calculated as the initial amount of the lease liability, plus any lease payments made before lease commencement, plus initial direct costs, less any lease incentives. The lease liability and theright-of-use asset are recorded in the consolidated statements of financial position.its corporate headquarters.
The components of lease related expenses are as follows:
| Three months ended March 31, |
| ||||||||||||||
| Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 |
| 2021 |
|
| 2020 |
| |||||||||
Operating lease expense(a) | $ | 608 | $ | 611 |
| $ | 622 |
|
| $ | 608 |
| ||||
|
| |||||||||||||||
Finance lease expense: |
|
|
|
|
|
|
|
| ||||||||
Amortization ofright-of-use assets | $ | 21 | $ | 20 |
| $ | 11 |
|
| $ | 21 |
| ||||
Interest on lease liabilities | 1 | 3 |
|
| — |
|
|
| 1 |
| ||||||
|
| |||||||||||||||
Total finance lease expense | $ | 22 | $ | 23 |
| $ | 11 |
|
| $ | 22 |
| ||||
|
| |||||||||||||||
(a) | Includes short-term lease costs of$148 and $200 |
Cash paid for amounts included in the measurement of lease liabilities:
| Three months ended March 31, |
| ||||||||||||||
| Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 |
| 2021 |
|
| 2020 |
| |||||||||
Operating cash flows from operating leases | $ | 271 | $ | 254 |
| $ | 128 |
|
| $ | 271 |
| ||||
Operating cash flows from finance leases | $ | 1 | $ | 3 |
| $ | - |
|
| $ | 1 |
| ||||
Financing cash flows from finance leases | $ | 21 | $ | 18 | ||||||||||||
Finance cash flows from finance leases |
| $ | 155 |
|
| $ | 21 |
| ||||||||
March 31, | ||||||
Weighted average remaining lease term: | ||||||
Operating leases | 4.1 | |||||
Finance leases | 1.1 | |||||
Weighted average discount rate: | ||||||
Operating leases | 5.73 | % | ||||
Finance leases | 6.25 | % | ||||
Maturities of lease liabilities are as follows:
| Operating leases | Finance leases | |||||||
Remainder of 2020 | $ | 987 | $ | 44 | ||||
2021 | 1,355 | 30 | ||||||
2022 | 1,140 | 10 | ||||||
2023 | 920 | — | ||||||
2024 | 562 | — | ||||||
Thereafter | 800 | — | ||||||
|
|
|
| |||||
Undiscounted lease cash flow commitments | 5,764 | 84 | ||||||
Reconciling impact from discounting | (808 | ) | (4 | ) | ||||
|
|
|
| |||||
Lease liabilities on consolidated statement of financial position as of March 31, 2020 | $ | 4,956 | $ | 80 | ||||
|
|
|
| |||||
8
VILLAGE FARMS INTERNATIONAL, INC.
Notes to Condensed Consolidated Interim Financial Statements
(In thousands of United States dollars, except per share amounts, unless otherwise noted)
Maturities of lease liabilities are as follows:
|
| Operating leases |
|
| Finance leases |
| ||
Remainder of 2021 |
| $ | 980 |
|
| $ | 18 |
|
2022 |
|
| 1,090 |
|
|
| 9 |
|
2023 |
|
| 870 |
|
|
| — |
|
2024 |
|
| 512 |
|
|
| — |
|
2025 |
|
| 258 |
|
|
|
|
|
Thereafter |
|
| 433 |
|
|
| — |
|
Undiscounted lease cash flow commitments |
|
| 4,143 |
|
|
| 27 |
|
Reconciling impact from discounting |
|
| (452 | ) |
|
| (2 | ) |
Lease liabilities on consolidated statement of financial position as of March 31, 2021 |
| $ | 3,691 |
|
| $ | 25 |
|
8 |
|
Summarized Equity Earnings (Losses) from Unconsolidated Entities
| Equity earnings from unconsolidated entities | ||||||||
| Three months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
Pure Sunfarms | $ | 3,531 | $ | 2,641 | ||||
VF Hemp | (302 | ) | (30 | ) | ||||
|
|
|
| |||||
Total | $ | 3,229 | $ | 2,611 | ||||
|
|
|
| |||||
Pure Sunfarms Corp.
On June 6, 2017, the Company entered into anNovember 2, 2020, Village Farms consummated a definitive purchase and sale agreement to form Pure Sunfarms, a B.C. corporation, with Emerald Health Therapeutics Inc. (“Emerald”). The purpose, acquiring 36,958,500 common shares in the capital of Pure Sunfarms isowned by Emerald, and increasing Village Farms’ ownership of Pure Sunfarms to produce, market100%. The shares were acquired for a total purchase price of C$79.9 million (US$60.0 million), satisfied through an initial C$60.0 million (US$45.0 million) cash payment and distribute cannabisa C$19.9 million (US$15.0 million) secured promissory note that was payable to Emerald, which promissory note was repaid in Canada.full on February 8, 2021.
The acquisition was a business combination and has been accounted for in accordance with the measurement and recognition provisions of Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (ASC Topic 850”). ASC Topic 805 requires that the purchase consideration be allocated to the assets acquired and liabilities assumed in a business combination based upon their estimated fair values at the date of acquisition. The purchase price has been allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The Company accountsused information available to make fair value determinations and engaged independent valuation specialists to assist in the fair value determination of acquired intangible assets. The estimated fair value of licenses was determined using a multi-period excess earnings method. This earnings-based method considers the 85 net present value of the licenses’ cash flows discounted at an asset specific discount rate. The net present value attributable to the licenses deducts the contributory asset charges used in connection with the licenses. The estimated fair value of the brand was determined using the relief-from-royalty method. This method assumes that the brand has value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires the Company to estimate the future revenues for the related brand, the appropriate royalty rate, and an asset specific discount rate. This measure of fair value requires considerable judgment about the value a market participant would be willing to pay to achieve the benefits associated with the brand. Acquired property, plant and equipment and software was valued using the replacement cost method, which requires the Company to estimate the costs to construct an asset of equivalent utility at prices available at the time of the valuation analysis, with adjustments in value for physical deterioration and functional and economic obsolescence. Upon the acquisition of Pure Sunfarms, the Company identified goodwill of C$30,618 (US$24,314). This goodwill was calculated as the difference between the fair value of the consideration issued for the acquisition of Pure Sunfarms and the fair value of all assets and liabilities acquired. The goodwill is attributable to the acquired workforce and potential for growth through the conversion of the Delta 1 greenhouse facility and future accretive acquisitions. The Company is required to record a deferred tax liability for the difference between the assigned values and the tax bases of assets acquired and liabilities assumed. None of the goodwill is deductible for tax purposes. As a result of the acquisition, the Company also recognized a gain of $23.6 million due to the revaluation of its previously held investment in Pure Sunfarms to its fair value at the acquisition date. The initial accounting for the business combination was considered complete for the year ended December 31, 2020.
The following table shows the allocation of the purchase price to assets acquired and liabilities assumed, based on estimates of fair value, including a summary of the identifiable classes of consideration transferred, and amounts by category of assets acquired and liabilities assumed at the acquisition date:
9
VILLAGE FARMS INTERNATIONAL, INC.
Notes to Condensed Consolidated Interim Financial Statements
(In thousands of United States dollars, except per share amounts, unless otherwise noted)
Consideration paid |
| Shares |
|
| Share Price |
|
| Amount |
| |||
Cash |
|
|
|
|
|
|
|
|
| $ | 45,259 |
|
Promissory note |
|
|
|
|
|
|
|
|
|
| 15,011 |
|
Shareholder loan |
|
|
|
|
|
|
|
|
|
| 4,529 |
|
Promissory note owed to PSF from Emerald |
|
|
|
|
|
|
|
|
|
| 439 |
|
Due to related party |
|
|
|
|
|
|
|
|
|
| 61 |
|
Fair value of previously held investment shares held by Village Farms |
|
| 52,569,197 |
|
| $ | 1.767 |
|
|
| 92,881 |
|
Total fair value of consideration |
|
|
|
|
|
|
|
|
| $ | 158,180 |
|
|
| November 2, 2020 |
| |
ASSETS |
|
|
|
|
Cash and cash equivalents |
| $ | 10,860 |
|
Trade receivables, net |
|
| 10,553 |
|
Inventories |
|
| 32,393 |
|
Prepaid expenses and deposits |
|
| 3,572 |
|
Property, plant and equipment |
|
| 122,831 |
|
Goodwill |
|
| 23,095 |
|
Intangibles |
|
| 16,670 |
|
Total assets |
|
| 219,974 |
|
LIABILITIES |
|
|
|
|
Trade payables |
|
| 3,849 |
|
Accrued liabilities |
|
| 13,062 |
|
Income taxes payable |
|
| 2,173 |
|
Current maturities of long-term debt |
|
| 2,306 |
|
Deferred revenue |
|
| 77 |
|
Long-term debt |
|
| 23,903 |
|
Deferred tax liabilities |
|
| 16,424 |
|
Total liabilities |
|
| 61,794 |
|
Net assets acquired |
| $ | 158,180 |
|
Prior to its acquisition on November 2, 2020, the Company accounted for its investment in Pure Sunfarms, in accordance with Accounting Standards Codification (ASC)ASC Topic 323, Equity Method and Joint Ventures (“ASC Topic 323”), using the equity method. The Company has determined that Pure Sunfarms iswas a variable interest entity (“VIE”), however the Company doesdid not consolidate Pure Sunfarms because the Company iswas not the primary beneficiary. Although the Company iswas able to exercise significant influence over the operating and financial policies of Pure Sunfarms through its then 58.7% majority ownership interest, the Company sharesshared joint control of the Boardboard of Directorsdirectors and therefore iswas not the primary beneficiary. The Company’s maximum exposure to loss as a result of its involvement with Pure Sunfarms as of March 31, 2020 relates primarily to the Company’s investment of $55,607 and the recovery of the outstanding loan to Pure Sunfarms of $9,959.
The Company is required to apply the hypothetical liquidation at book value (“HLBV”) method to determine its allocation of the profits and losses in Pure Sunfarms. When determining its allocation of profits and losses, the HLBV method only considers shares that have been fully paid for. Therefore, due to the monthly escrow payments made by Emerald in 2019 in accordance with the Delta 2 Option and Escrow Agreements, the ownership changed each month in 2019 as escrow payment(s) were made. Under the hypothetical liquidation method, the Company received 57.4% and 57.6% of Pure Sunfarms’ earnings forFor the three months ended March 31, 2020, and 2019, respectively. In 2020, all of the escrow payments were made so the allocation of profits and losses is based on shares outstanding at the end of each month.
On March 31, 2019,Company’s equity earnings from Pure Sunfarms exercised its option to utilize the Delta 2 assets and operations. The contribution of the assets has been accounted for as a disposal of the land, greenhouse facility and other assets in exchange for 25,000,000 common shares of Pure Sunfarms. This was anon-cash transaction, and it was estimated that the fair value of the land, building and other assets was $18.7 million (CA$25 million) at the date of contribution. The Company recognized a gain of $13.6 million on the contribution of the fixed assets.were $3,531.
On March 2, 2020, pursuant to the Settlement Agreement, Emerald transferred to the Company 2.5% of additional equity in Pure Sunfarms. The Company determined the fair value of the equity received from Emerald to be CA$C$6.5 million (US$4.7 million). The Company recorded this amount as a gain and it’s included it as a gain on nonmonetary exchangesettlement agreement on the consolidated statementCondensed Consolidated Statement of incomeIncome (Loss) and comprehensive incomeComprehensive Income (Loss) for the three months ended March 31, 2020.
As of March 31, 2020, and December 31, 2019, the total investment in Pure Sunfarms of $55.6 million and $41.3 million, respectively, was recorded in the consolidated statements of financial position.
The Company’s share of the joint venture consists of the following:
Balance, January 1, 2019 | $ | 6,341 | ||
Investments in joint venture | 18,717 | |||
Share of net income for the year | 16,276 | |||
|
| |||
Balance, December 31, 2019 | $ | 41,334 | ||
|
| |||
Balance, January 1, 2020 | $ | 41,334 | ||
Investments in joint venture | 10,742 | |||
Share of net income for the period | $ | 3,531 | ||
|
| |||
Balance, March 31, 2020 | $ | 55,607 | ||
|
|
10
VILLAGE FARMS INTERNATIONAL, INC.
Notes to Condensed Consolidated Interim Financial Statements
(In thousands of United States dollars, except per share amounts, unless otherwise noted)
Summarized financial information of Pure Sunfarms (in USD):Sunfarms:
| March 31, 2020 | December 31, 2019 | |||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 608 | $ | 7,356 | ||||
Trade receivables | 12,809 | 8,687 | ||||||
Inventory | 29,970 | 21,745 | ||||||
Other current assets | 5,933 | 6,964 | ||||||
Non-current assets | 105,921 | 108,652 | ||||||
Current liabilities | ||||||||
Trade payables | (12,288 | ) | (4,938 | ) | ||||
Borrowings due to joint ventures | (10,311 | ) | (26,413 | ) | ||||
Income taxes payable | (8,843 | ) | (8,489 | ) | ||||
Borrowings – current | (1,341 | ) | (1,423 | ) | ||||
Other current liabilities | (11,360 | ) | (5,021 | ) | ||||
Non-current liabilities | ||||||||
Borrowings – long term | (11,642 | ) | (13,089 | ) | ||||
Deferred tax liabilities | (3,372 | ) | (2,473 | ) | ||||
|
|
|
| |||||
Net assets | $ | 96,084 | $ | 91,558 | ||||
|
|
|
| |||||
|
| Three months ended |
|
| Three months ended |
| ||
|
| March 31, 2021 |
|
| March 31, 2020 |
| ||
Sales |
| $ | 17,459 |
|
| $ | 13,137 |
|
Cost of sales* |
|
| (12,322 | ) |
|
| (6,258 | ) |
Gross Margin |
|
| 5,137 |
|
|
| 6,879 |
|
Selling, general and administrative expenses |
|
| (5,119 | ) |
|
| (2,434 | ) |
Income from operations |
|
| 18 |
|
|
| 4,445 |
|
Interest expense |
|
| (372 | ) |
|
| (217 | ) |
Foreign exchange loss |
|
| (149 | ) |
|
| (179 | ) |
Other income, net** |
|
| (50 | ) |
|
| 4,332 |
|
Income before taxes |
|
| (553 | ) |
|
| 8,381 |
|
Recovery of (provision for) income taxes |
|
| 149 |
|
|
| (2,216 | ) |
Net income |
| $ | (404 | ) |
| $ | 6,165 |
|
| March 31, 2020 | December 31, 2019 | |||||||
Reconciliation of net assets: | ||||||||
Accumulated retained earnings | $ | 32,844 | $ | 26,679 | ||||
Contributions from joint venture partners | 70,088 | 63,481 | ||||||
Currency translation adjustment | (6,848 | ) | 1,398 | |||||
|
|
|
| |||||
Net assets | $ | 96,084 | $ | 91,558 | ||||
|
|
|
| |||||
| Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |||||||
Revenue | $ | 13,137 | $ | 10,801 | ||||
Cost of sales* | (6,258 | ) | (3,818 | ) | ||||
|
|
|
| |||||
Gross margin | 6,879 | 6,983 | ||||||
Selling, general and administrative expenses | (2,434 | ) | (999 | ) | ||||
|
|
|
| |||||
Income from operations | 4,445 | 5,984 | ||||||
Interest expense | (217 | ) | (1 | ) | ||||
Foreign exchange (loss) gain | (179 | ) | 39 | |||||
Other income, net** | 4,332 | 10 | ||||||
|
|
|
| |||||
Income before taxes | 8,381 | 6,032 | ||||||
Provision for income taxes | (2,216 | ) | (1,629 | ) | ||||
|
|
|
| |||||
Net income | $ | 6,165 | $ | 4,403 | ||||
|
|
|
| |||||
** Includes gain recognized on settlement of net liabilities of $4,348.
Village Fields Hemp USA LLC
11 VILLAGE FARMS INTERNATIONAL, INC. Notes to Condensed Consolidated Interim Financial Statements (In thousands of United States dollars, except per share amounts, unless otherwise noted)
Summarized financial information of VF Hemp:
In February 2021, the Company exercised a portion of its option to make an additional equity investment in Australia-based Altum International Pty Ltd (“Altum”). The Company exercised 204,000 options at $2.45 per option increasing its ownership to just under 10.0%.
The carrying value of the The The Company, excluding Pure Sunfarms’ borrowings,
VILLAGE FARMS INTERNATIONAL, INC. Notes to Condensed Consolidated Interim Financial Statements (In thousands of United States dollars, except per share amounts, unless otherwise noted)
Pure Sunfarms is required to comply with financial covenants, measured quarterly. As of March 31, The weighted average interest rate on short-term borrowings as of March 31,
Accrued interest payable on the
The aggregate annual maturities of long-term debt for the
The
On March 25, 2019, the Company entered into a Grid Loan Agreement (the “Grid Loan”) with VF Hemp. The Grid Loan has a maturity date of March 25, 2022 and bears simple interest at the rate of 8% per annum, calculated monthly. As of March 31, One of the Company’s employees is related to a member of the Company’s executive management team and received approximately $37 and $28 in salary and benefits during the three months ended March 31,
A provision for income taxes is recognized based on management’s best estimate of the weighted average annual income tax rate expected for the full financial year. The estimated average annual rate used for the three months ended March 31, The recovery 13 VILLAGE FARMS INTERNATIONAL, INC. Notes to Condensed Consolidated Interim Financial Statements (In thousands of
Segment reporting is prepared on the same basis that the Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker, manages the business, makes operating decisions and assesses performance. Management has determined that the Company operates in The Company’s primary operations are in the United States and Canada. Segment information
Basic and
14 VILLAGE FARMS INTERNATIONAL, INC. Notes to Condensed Consolidated Interim Financial Statements (In thousands of United States dollars, except per share amounts, unless otherwise noted)
On January 20, 2021, the On September 10, 2020, the Company sold 9,396,226 units through a registered direct offering. Each unit that was sold consisted of one common share of the Company and one-half (0.5) of a warrant to purchase a common share of the Company at a price of $5.80. On March 10, 2021, the warrants became exercisable and will expire on September 10, 2025. As of March 31,
Share-based compensation expense for the three months ended March 31, 2021 and 2020 was $1,998 and Stock option activity for the three months ended March 31,
Performance-based shares activity for the three months ended March 31,
In the normal course of business, the Company and its subsidiaries may become defendants in certain employment claims and other litigation. The Company records a liability when it is probable that a loss has been incurred and the amount As of March 31, 2021, Pure Sunfarms had a commitment of $1,000 in the event of a service agreement break up.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated interim financial statements and related notes included in Item 1 of Part I of this Quarterly Report and the Management’s Discussion and Analysis of Financial Condition and Results of Operations and consolidated financial statements contained in our Annual Report on Form10-K for the year ended December 31, EXECUTIVE OVERVIEW
one of the best-selling brands in Canada. Pure Sunfarms leverages our 30 years of experience as a vertically integrated greenhouse grower for the rapidly In our greenhouse operations, we produce and distribute fresh, premium-quality produce with consistency 365 days a year The Company, through its subsidiary VF Clean Energy, Inc. (“VFCE”), owns and operates a The Company entered the U.S. hemp business in the Internationally, we evaluate, and target select, nascent, legal cannabis and CBD opportunities with significant long-term potential, with an initial focus on the Asia-Pacific region through our investment in Australia-based Altum International Pty Ltd (“Altum”). Registered Direct Offering On January 20, 2021, Village Farms completed a registered direct offering with certain institutional investors for the purchase and sale of an aggregate 10,887,097 Common Shares at a purchase price of $12.40 (approximately C$15.70) per Common Share for gross proceeds of approximately $135 million
In March 2020, the World Health Organization declared the outbreak of theCOVID-19 virus a global pandemic. This outbreak To date, all of our financial condition, will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and any recovery period, future actions taken by governmental authorities, central banks and other third parties Recent Developments Repayment of Emerald Promissory Note On February 5, 2021, Village Farms repaid in full the Promissory Note of C$19,900 plus accrued interest of C$622 to Emerald Health Therapeutics, Inc. (”Emerald”), that was issued in conjunction with the Purchase Agreement on September 8, 2020. The Company no longer owes any amounts to Emerald with respect to the Pure Sunfarms Transaction and the previously pledged 9,239,625 Common Shares of Pure Sunfarms have been released to the Company by the collateral agent. The Company was added to the S&P/TSX Composite Index Village Farms was added to the S&P/TSX Composite Index (Consumer Staples sector) prior to trading on March 22, 2021. The S&P/TSX Composite Index is the headline index for the Canadian equity market and is the broadest index in the S&P/TSX family. We Exercise of Warrants In the first quarter of 2021, warrants issued as part of the September 2020 registered direct offering were exercised, resulting in proceeds to the Company of $17,663 and the issuance of 3,045,283 additional Common Shares. There are 1,652,830 remaining warrants from the September 2020 registered direct offering as of the date of this filing. Amendment of the Company’s Operating Loan On May 7, 2021, Village Farms amended the Operating Loan terms to extend the credit agreement with an amended line of credit of C$10,000 and maturity date of May 7, 2024. See “Liquidity and Capital Resources – Operating Loan”. Pure Sunfarms During the first quarter of 2021, Pure Sunfarms continued seeking opportunities to increase its production, sales, brand awareness and global footprint. A few notable accomplishments include:
Village Farms Clean Energy In November 2020, VFCE entered into a partnership with Mas Energy to convert the current landfill gas to electricity business into a state-of-the-art landfill gas to high-demand renewable natural gas facility. Mas Energy will design, build, finance, own and operate the Delta RNG Project. VFCE renewed and extended the existing contract with the City of Vancouver to capture the landfill gas at its Delta, B.C. site. The 20-year extension, with a five-year option, commences upon the start-up of the commercial operations of the Delta RNG Project. We anticipate that the conversion to the Delta RNG Project will begin mid-2021 with commercial operations to commence in mid-2022. We expect the project to capture the CO2 from the renewable natural gas production process and make it available to Village Farms for producing crops in its three Delta, B.C. vegetable and cannabis greenhouses. The reduction in natural gas requirements is expected to decrease the total carbon footprint of Village Farms. International On February 8, 2021, Village Farms exercised an option to increase its equity investment in Altum from 6.6% to just under 10%. On May 5, 2021, Village Farms exercised its remaining option to increase its equity investment in Altum to just under 12%. The investment in Altum, one of Asia-Pacific’s leading CBD platforms, represents a capital efficient means to participate in opportunities in this region. Presentation of Financial Results Our consolidated results of operations (prior to net income) for the three months ended March 31, 2021 and 2020 income for March 31, 2020. However, for the RESULTS OF OPERATIONS
(In thousands of U.S. dollars, except per share Consolidated Financial Performance
Segmented Financial Performance The following segmented financial information includes the financial results of our cannabis segment (Pure Sunfarms), before any allocation to Village Farms, which
Discussion of A discussion of
We also present a discussion of the operating results of Pure Sunfarms, before any allocation to Village Farms, which were not consolidated in our financial results for the three months ended March 31, 2020 but were consolidated in our results for the three months ended March 31, 2021. As a result of the Pure Sunfarms Acquisition, Pure Sunfarms recognized an increase in the fair value of charge to cost of Consolidated Results Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 Sales Sales for the three months ended March 31, 2021 were $52,396 as compared to $32,112 for the three months ended March 31, 2020. The increase in sales was primarily due to the inclusion of Pure Sunfarms’ Q1 2021 revenues of $17,460 and an increase in produce supply partner sales of $4,139, partially offset by a decrease in our own produce sales of ($1,234) and VFCE power sales of ($81). The produce supply partner sales increase was due to Cost of Sales Cost of sales for the three months ended March 31, 2021 were $50,089 as compared to $31,347 for the three months ended March 31, 2020. The increase in cost of sales was primarily due to the addition of Pure Sunfarms’ Q1 2021 cost of sales of $15,248, an increase in produce supply partner costs of $3,282 and higher clean energy costs of $356, partially offset by a decrease in our own production cost of sales of ($144). The Q1 2021 cost of sales for Pure Sunfarms includes a $2,925 charge from the revaluation of its inventory to fair value at acquisition date. The increase in produce supply partner cost of sales was driven by higher volumes of pounds sold and the increase in clean energy costs were driven by higher depreciation charges. The decrease in our own production costs was driven by lower cost per pound production at two of our Texas facilities and better utilization of our transportation and handling cost, primarily due to greenhouse management efficiency efforts. Gross Margin Gross margin for the three months ended March 31, 2021 increased $1,542 to $2,307, for a 4% gross margin (including the $2,925 charge from the revaluation of Pure Sunfarms’ inventory to fair value at acquisition date), in comparison to $765, for a 2% gross margin, for the three months ended March 31, 2020. Gross margin for the three months ended March 31, 2021 increased $4,467 to $5,232, for a 10% gross margin (excluding the $2,925 charge from the revaluation of Pure Sunfarms’ inventory to fair value at acquisition date). Gross margin (excluding the revaluation charge) increased due to the inclusion of Pure Sunfarms’ Q1 2021 gross margin of $5,137, partially offset by a lower produce gross margin of ($226) and a lower clean energy gross margin of ($444). The decreased produce gross margin was primarily due to lower prices for tomatoes in Q1 2021 and the lower gross margin for clean energy was driven by higher depreciation charges as the depreciable life of VFCE assets have been accelerated due to the upcoming transition of operations to the Delta RNG Project expected in mid-2021. Selling, General and Administrative Selling, general and administrative expenses for the three months ended March 31, 2021 increased $4,171 to $8,092 compared to $3,921 for the three months ended March 31, 2020. The increase was primarily due to the inclusion of Pure Sunfarms’ expenses of $3,966 and an increase in corporate expenses, primarily related to public company costs such as investor relations, legal and regulatory fees, listing fees for the TSX, January 2021 equity raise and incremental costs of U.S. reporting compliance. Share-Based Compensation Share-based compensation expenses for the three months ended March 31, 2021 were $1,998 as compared to $529 for the three months ended March 31, 2020. The increase in share-based compensation was primarily due to the vesting of performance share grants for Pure Sunfarms’ management of $1,094 in Q1 2021 versus nil in Q1 2020, along with the cost of issuing stock options in December 2020. Gain on Settlement Agreement On March 2, 2020, pursuant to the settlement agreement between the Company, Pure Sunfarms and Emerald (“Settlement Agreement”), Emerald transferred to the Company 2.5% of additional equity in Pure Sunfarms. The Company determined the fair value of the equity received from Emerald to be $4,681 (C$6,500). The Company recorded this amount as a gain on non-monetary exchange on the Consolidated Statement of Income (Loss) and Comprehensive Income (Loss) for the three months ended March 31, 2020. Recovery of Income Taxes Income taxes for the three months ended March 31, 2021 was a recovery of $1,839 compared to a recovery of $1,012 for the three months ended March 31, 2020. For the three months ended March 31, 2021 and 2020, our effective tax rate, including both current and deferred income taxes, was 19.9% and 31.8%, respectively. The equity losses for our unconsolidated entity, VFH, is reported post-tax and therefore does not affect our tax calculation. Our share of income for Pure Sunfarms was presented in equity earnings from unconsolidated entities for the three months ended March 31, 2020. Village Farms began fully consolidating operating results of Pure Sunfarms on November 2, 2020; Pure Sunfarms’ operating results are fully consolidated for the three months ended March 31, 2021. Equity (Losses) Earnings from Unconsolidated Entities Our share of earnings from our joint ventures for the three months ended March 31, 2021 was ($127) compared to $3,229 for the three months ended March 31, 2020. Our share of income from Pure Sunfarms was presented in equity earnings from unconsolidated entities for the three months ended March 31, 2020. Village Farms began fully consolidating operating results of Pure Sunfarms on November 2, 2020 and Net (Loss) Income Net loss for the three months ended March 31, 2021 was Adjusted EBITDA Adjusted EBITDA for the three months ended March 31, 2021 was $404 compared to $1,096 for the three months ended March 31, 2020. The decrease in adjusted EBITDA was primarily due to lower operating results of both Pure Sunfarms and the produce business. See the reconciliation of Adjusted EBITDA to net income in “Non-GAAP Measures—Reconciliation of Net Earnings to Adjusted EBITDA”. Cannabis Segment Results – Pure Sunfarms Pure Sunfarms’ comparative analysis are based on the consolidated results of Pure Sunfarms for the three months ended March 31, 2021, December 31, 2020, and March 31, 2020, not accounting for the percentage owned by Village Farms. As a result of the Pure Sunfarms Acquisition, Pure Sunfarms recognized an increase in the fair value of its inventory on-hand on the acquisition date, resulting in a $2,925 charge to cost of sales in the first quarter of 2021 and a $3,295 charge to cost of sales in the fourth quarter of 2020 from the revaluation of its inventory to fair value. This is a non-cash accounting charge to cost of sales and should be adjusted for when analyzing the actual operational results of Pure Sunfarms. See “Reconciliation of U.S. GAAP Results to Proportionate Results” for a presentation of Pure Sunfarms’ proportionate results for the three months ended March 31, 2021 and March 31, 2020. Three Months Ended March 31, 2021 Compared to Three Months Ended December 31, 2020 Sales Pure Sunfarms’ net sales for the three months ended March 31, 2021 were $17,460 as compared to $17,303 for the three months ended December 31, 2020. The sequential net sales increase was comprised of a 20% increase in branded sales, partially offset by a (49%) decrease in non-branded sales. For the three months ended March 31, 2021, 71% of revenue was generated from branded flower and 13% of revenue from tinctures and Cannabis 2.0 products (branded cannabis oil, edibles and vapes) as compared to 56% of revenue from branded flower and 12% of revenue from tinctures and Cannabis 2.0 products for the three months ended December 31, 2020. For the three months ended March 31, 2021, non-branded sales represented 16% of revenues compared to 32% for the three months ended December 31, 2020.The decrease in non-branded sales between comparable periods was driven primarily by an oversaturated wholesale market combined with the impact of several provincial boards initiating stock keeping unit (“SKU”) rationalization and management of their March 31, 2021 fiscal year-end inventory levels, which decreased demand from other licensed producers (“LP”) in the wholesale market. Cost of Sales Pure Sunfarms’ cost of sales for the three months ended March 31, 2021 was $15,248 as compared to $13,918 for the three months ended December 31, 2020. The Q1 2021 and Q420 cost of sales for Pure Sunfarms includes a $2,925 and $3,295 charge, respectively, from the revaluation of its inventory to fair value at acquisition date. The increase in cost of sales between periods was driven by the higher volume of branded sales which require incremental costs for manufacturing, packaging and distribution. Gross Margin Gross margin for the three months ended March 31, 2021 decreased ($1,173) to $2,212, for a 13% gross margin, in comparison to $3,385, for a 20% gross margin, for the three months ended December 31, 2020. Gross margin for the three months ended March 31, 2021 decreased ($1,542) to $5,137, for a 29% gross margin (excluding the purchase price inventory adjustment of $2,925), in comparison to $6,679, for a 39% gross margin (excluding the purchase price inventory adjustment of $3,295), for the three months ended December 31, 2020. The decrease in gross margin between periods was primarily due to the increase in cost of sales associated with the higher volume of branded sales in 2021 that require incremental costs for manufacturing, packaging and distribution. Selling, General and Administrative Expenses Pure Sunfarms’ selling, general and administrative expenses for the three months ended March 31, 2021 were $3,966 compared to $4,476 for the three months ended December 31, 2020. The decrease in selling, general and administrative expenses for the three months ended March 31, 2021 in comparison to the three months ended December 31, 2020 was primarily due to a reduction in marketing spend and
Share-based compensation expenses for the three months ended March 31, 2021 were $1,094 as compared to $61 for the three months ended December 31, 2020. The increase in share-based compensation is due to the vesting of performance share grants for Pure Sunfarms’ management as well as the incremental cost of issuing stock options in December 2020. Net (Loss) Income
Adjusted EBITDA Adjusted EBITDA for the three months ended March 31, 2021 and December 31, 2020 was $2,534 and $2,279, respectively. The increase in Adjusted EBITDA was driven by higher net sales and lower selling, general and administrative expenses in the three months ended March 31, 2021 as compared to the three months ended December 31, 2020. The three months ended December 31, 2020 also included a $757 write-off of a note receivable from Emerald as part of the Pure Sunfarms acquisition. Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 Sales Pure Sunfarms’ net sales for the three months ended March 31, 2021 were $17,460 as compared to $13,137 for the three months ended March 31, 2020. The period-over-period net sales increase was comprised of a 117% increase in branded sales, partially offset by a (62%) decrease in non-branded sales. For the three months ended March 31, 2021, 71% of revenue was generated from branded flower and 13% of revenue from tinctures and Cannabis 2.0 products as compared to 47% of revenue from branded flower for the three months ended March 31, 2020. Pure Sunfarms had not begun selling Cannabis 2.0 products in the three months ended March 31, 2020. For the three months ended March 31, 2021, non-branded sales represented 16% of revenues compared to 53% for the three months ended March 31, 2020. The decrease in non-branded sales between periods was driven primarily by an oversaturated wholesale market combined with the impact of several provincial boards initiating SKU rationalization and management of their March 31, 2021 fiscal year-end inventory levels, which decreased demand for many LPs in the wholesale market. Cost of Sales Pure Sunfarms’ cost of sales for the three months ended March 31, 2021 were $15,248 as compared to $6,258 for the three months ended March 31, 2020. The Q1 2021 cost of sales for Pure Sunfarms includes a $2,925 charge from the revaluation of its inventory to fair value at acquisition date. The increase in cost of sales between periods was driven by the higher volume of branded sales which require incremental costs for manufacturing, packaging and distribution. Gross Margin Gross margin for the three months ended March 31, 2021 decreased ($4,667) to $2,212, for a 13% gross margin (including the purchase price inventory adjustment of $2,925), in comparison to $6,879, for a 52% gross margin, for the three months ended March 31, 2020. Gross margin for the three months ended March 31, 2021 decreased ($1,742) to $5,137, for a 29% gross margin (excluding the purchase price inventory adjustment of $2,925). The decrease in gross margin between comparable periods was primarily due to price compression in the wholesale market over the past 12 months combined with the increase in cost of sales associated with a higher volume of branded sales which require incremental costs for manufacturing, packaging and distribution. Selling, General and Administrative Expenses Selling, general and administrative expenses for the three months ended March 31, 2021 increased $1,532, or (63%), to $3,966 compared to $2,434 for the three months ended March 31, 2020. The increase in selling, general and administrative expenses was due to incremental sales support and marketing for the higher volume of branded sales in 2021 along with additional headcount to support the growth of Pure Sunfarms. Share-Based Compensation Share-based compensation expenses for the three months ended March 31, 2021 were $1,094 as compared to nil for the three months ended March 31, 2020. The increase in share-based compensation was primarily due to the vesting of performance share grants for Pure Sunfarms’ management and Pure Sunfarms’ management not being part of the Company until November 2020. Gain on Settlement of Net Liabilities Pure Sunfarms recognized income of $4,348 in the first quarter of 2020 as an outcome of the March 2, 2020 Settlement Agreement between Net (Loss) Income
Adjusted EBITDA Adjusted EBITDA for the three months ended March 31, 2021 and March 31, 2020 Liquidity and Capital Resources Capital Resources At March 31, 2021, we had $131,696 in cash and $165,423 of working capital, and at December 31, 2020, we had $21,640 in cash and $29,528 of working capital. We expect to utilize cash-on-hand and provide or obtain adequate financing to maintain and improve
Accrued interest payable on the Credit Facilities and Pure Sunfarms Loans as of March 31, 2021 and December 31, 2020 Term Loan The Company has a term loan financing agreement with the Farm Credit Canada (“FCC”), a Canadian creditor (“FCC Term Loan”). Thenon-revolving variable rate term loan
Operating Loan The Company has a line of credit agreement with a Canadian chartered bank (“Operating Loan”). The revolving Operating Loan has a line of credit up to C$10,000, as amended on May 7, 2021, less outstanding letters of credit totaling US$150 and C$38 and includes variable interest rates with a maturity date of May 7, 2024. The Operating Loan is subject to margin requirements stipulated by the bank. As As collateral for the Operating Loan, the Company has provided promissory notes and a first priority security interest over its accounts receivable and inventory. In addition, the Company has granted full recourse guarantees and security therein. The carrying value of the assets pledged as collateral as of March 31, 2021 and December 31, 2020 was $25,033 and
VFCE has a loan agreement with a Canadian chartered bank that includes a non-revolving fixed rate loan (“ Pure Sunfarms Loans On March 15, 2021, Pure Sunfarms entered into the Third Amended and Restated Credit
The PSF The third loan facility is a C$25 million term loan (the “PSF Term Loan”) at Canadian prime interest rate plus an applicable margin, repayable in On December 20, 2020, Pure Sunfarms entered into a C$6,250 non-revolving demand loan at prime interest plus 3.75% per annum with a Canadian chartered bank with the Pure Sunfarms is required to comply with financial covenants measured quarterly. As of March 31, 2021, Pure Sunfarms was in compliance with the financial covenants. Emerald Promissory Note The Company had a note payable due to Emerald of C$19,900 (US$15,314), plus accrued interest included in the statements as of December 31, 2020 that the Company originally issued to Emerald as partial consideration for the November 2, 2020 acquisition of Pure Sunfarms. The note and accrued interest were repaid to Emerald in full on February 5, 2021. Equity Offerings The Company closed equity offerings on Summary of Cash Flows
Operating Activities For the three months ended March 31, Investing Activities For the three months ended March 31, 2021 and 2020, cash flows used in investing activities Financing Activities For the three months ended March 31,
the Emerald Promissory Note. For the three months ended March 31, 2020, cash flows provided by financing activities primarily consisted of the $7,324 generated from the issuance of Common Shares, net of issuance costs, Contractual Obligations and Commitments
As of March 31, 2021, Pure Sunfarms
Non-GAAP Measures References in this We also present Adjusted EBITDA, earnings per share and diluted earnings per share on a proportionate segment basis. Each of the components of Adjusted EBITDA, on a proportionate segment basis (which include our proportionate share of the Pure Sunfarms and Reconciliation of Net Income to Adjusted EBITDA The following table reflects a reconciliation of net income to Adjusted EBITDA, as presented by the Company:
Notes:
Reconciliation of U.S. GAAP Results to Proportionate Results The following tables are a reconciliation of the GAAP results to the proportionate results (which include our proportionate share of Pure Sunfarms and VF Hemp operations). The tables reflect the full statements of income for Pure Sunfarms (Cannabis) and VFH (Hemp) multiplied by the ownership percentage of the Company (versus presenting the results of these joint ventures in Equity Earnings from Unconsolidated Entities):
Notes:
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